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The issue at the core of Apple’s share price falls

There may be all sorts of reasons why Apple’s share price has been falling over the last couple of months but – dull as it may be – there is only one that matters and it is valuation

04/12/2018

Ben Arnold

Ben Arnold

Investment Specialist, Equity Value

We'd like to make it clear at the start that we are not recommending you buy or sell Apple stock based on information in this piece and it's purely being used as an example. 

On 2 August of this year, as its share price edged above $207 (£163), Apple became the first business in history to be valued at $1 trillion. 

After reaching a high of $236 in early October, though, the technology giant’s share price has largely been on a downward trajectory and, having hit a six-month low of $172 last month, now stands around the $180 mark.

What, then, is going on?

Let’s rephrase that as a multiple-choice question: Apple’s shares have been falling because:

 

A) Investors are worried about iPhone sales.

B) Apple’s high prices could leave it exposed if the economy sours.

C) Investors are not confident – yet – about Apple’s services business.

D) Apple reflects broader market concerns, such as US-China trade tensions.

 

Of course, no multiple-choice question is complete without one more possible answer but should it be ‘All of the above’ or ‘None of the above’?

Well, that depends on whether you ask the BBC or us. According to this BBC article, all four of the above reasons have “taken the shine off Apple”, as it neatly puts it.

Here on The Value Perspective, we are nowhere near as certain.

Maybe one of those explanations lies behind the fall in Apple’s share price – maybe some combination of them does – although rather more likely, if distinctly less interesting, is that the market finally decided the business had become too expensive.

And yet valuation is something the BBC piece mentions just once – and only in the much wider context of “overly optimistic valuations” across the market as a whole.

Creating a narrative is dangerous

We have warned before, in pieces such as Beware explanations, against the dangers of creating a narrative about any investment. Granted, it does appear it may be hardwired into the human brain to love a good story – and yet any narrative about why an investment behaves in a certain way is likely to distract attention from the bare facts.

One problem with focusing on a single narrative – or even four – as an investor is that you are homing in on just one version of the future when of course you have no idea if it is the one that will play out.

You then risk becoming psychologically attached to your prediction, which could cloud the interpretation of new and inconvenient facts.

Here on The Value Perspective, we own plenty of stocks where we have no narrative and we are just fine with that because we know there are far more important aspects on which to focus our attention – most notably, undervalued businesses with strong balance sheets and low levels of debt, decent track records of producing earnings and free cashflow, and management teams with a solid history of sensible cash allocation. 

Some of these companies will have narratives, others will not but, if you buy enough of them, then on average you should do very nicely.

That is our idea of a story with a happy ending.

We are not recommending you buy or sell Apple stock based on information in this piece and it's purely being used as an example. 

Author

Ben Arnold

Ben Arnold

Investment Specialist, Equity Value

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